Tax

Why GE Pays Little in Taxes

Legal changes and court victories keep GE's tax bill lower than expected.
Stephen TaubJanuary 26, 2005

Despite a heavily profitable year, General Electric Company’s tax bill was relatively light in 2004.

Last week, the company reported an 18 percent increase in earnings for 2004. One of the reasons for that impressive metric was GE’s low tax rate.

Consider that in the fourth quarter, the conglomerate stated that its provision for income taxes was $677 million. This is just 11.2 percent of its $6.1 billion in pretax earnings. In fact, GE’s financial services company only shelled out about 3 percent of pretax earnings for taxes in the fourth quarter.

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For the full year, GE made a provision for income taxes of $3.5 billion, or 17.4 percent of its $20.1 billion in pretax earnings. Why did GE pay so little in taxes? The Financial Times attributes the final tax bill to what it calls a series of legal changes and court victories.

Some of the low tax rate was related to the sale of GE’s outsourcing business in India, which produced a gain of $336 million in what is a relatively low-tax jurisdiction.

But the company also got $13.7 billion in tax breaks thanks to the American Jobs Creation Act, passed last October, according to the FT. Although much of the legislation does not come into force until this month, GE officials said the company was already benefiting from changes to tax rules for its aircraft-leasing business, according to the newspaper.

Even Wall Street analysts were somewhat surprised by the low taxes rate. Citigroup’s Jeffrey Sprague told the paper that GE’s tax rate may “raise some eyebrows,” adding, “We are not sure yet what is behind this.”

For its part, GE attributes its shrinking tax rate to the fact that a growing share of its earnings come from overseas activities, often in low-tax jurisdictions, officials told the FT.